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We’ve been released from the grip of inflation, and the squeeze has finally eased a little. After falling to 3.9% last November, inflation briefly tightened its grip on our finances again, so it’s a relief to see it ease in February. Unfortunately, this doesn’t mean life is getting any less expensive, it’s just getting more expensive at a slower pace, and while we expect to see inflation keep falling – it isn’t letting go of us just yet.

Part of the February flop is down to the fact inflation surged a year earlier, by 1.1% in a month – to 10.4%, which is what we’re comparing prices to today.

A year ago, food inflation was 18.3%, whereas now it has dropped for the 11^th consecutive month to 5% – feeding lower inflation. As anyone who has been to the supermarket knows, this is very different from prices actually dropping. A handful of items are falling, including milk, cheese, butter, fish and jam. However, more generally, price rises have been baked into things like staff costs and manufacturing, so food and drink is just getting more expensive more slowly. More than nine in ten people have noticed their food bills rising in the past month, and two in five are buying less food to make ends meet.

Energy prices are also significantly less painful. Last February, the energy price guarantee was in place at £2,500 – well ahead of the cap today. Back then, electricity prices were up 66.7% in a year and gas up 129.4%. Right now, energy prices are down on the year, with electricity down 13% and gas down 26.5%, which has had a major impact on inflation. Along with transport costs, it’s the one major category of CPI which was negative over the year. However, energy bills are still significantly higher than they were before the pandemic. Still two in five people find it difficult to pay energy bills – and 3% are behind on payments.

It’s worth highlighting that the CPIH index differs from CPI quite significantly when it comes to housing costs, because it also includes rents – which has put upwards pressure on the other measure of inflation. CPI doesn’t look at housing costs, so this impact isn’t showing up in the data.

Petrol prices have risen slightly, in contrast to falls last year. So, although diesel prices are 10.8% lower than this time last year and petrol is down 3.9%, it’s putting some upwards pressure on inflation. This was partly offset by falls in second hand car inflation, for the seventh consecutive month, now the pandemic boom has run its course.

The pressure is set to keep easing in the next few months, as inflation drops rapidly towards the Bank of England’s target in the second quarter of the year. The energy price cap cut is waiting in the wings for April, helping cut one cost that has been putting so many households under so much pressure for the past few years.

Unfortunately we’re not out of the inflation woods just yet, because after hitting the target, inflation is expected to take hold of us again, and it will take a while for that to ease. As a result, the Bank of England has already said it’s not going to cut interest rates in a hurry. It’s going to wait for lower inflation to bed in. It means there’s a decent chance we won’t see cuts until August.

Source: Property Notify

The Office for Budget Responsibility says inflation is likely to fall to 2% in the second quarter of this year. We expect movement in this direction next week. But the Bank of England says that after this, inflation is likely to rise again for the rest of the year.

The market expects the Bank of England to cut rates in June and to end the year at 4.2%.

Inflation figures for February will be released on 20 March, and the MPC will reveal its rate decision on 21 March

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

”We’re on a downwards escalator, with another drop in inflation expected, and an accelerated move lower forecast for the months to come. But Bank of England policymakers are still set to hold their position, and grip on to higher interest rates.  They will want more evidence that wage growth will ramp down further before they budge and bring in a rate cut.

The Office of Budget Responsibility, the government’s independent forecaster, reckons inflation will hit the Bank’s 2% target this quarter. However, this could be a short-lived dip, and prices could take off again. Potentially inflationary pressures ahead include the ongoing fight for talent, higher shipping costs due to Red Sea disruption, and the increase in the minimum wage and business rates.

Increasing consumer and company optimism could see spending ramp up, potentially putting upwards pressure on prices. So, the name of the game will still be caution in the months ahead. Although a June cut is being pencilled in, a reduction in rates in August may be more likely, when the Bank also publishes the summer monetary policy report. Of course, the reticence over reducing rates sooner, given lacklustre growth, does mean that inflation could dip below target and that the economy will take longer to get going again, but for now it’s a risk that policymakers seem willing to take.”

Source: Property Notify

The most significant help for the property market is likely to come from a drop in the rate of inflation, which Chancellor Jeremy Hunt stated is expected to fall to its target of 2%, if not lower, within a matter of months.

Spiralling inflation and a seemingly constant increase in the Bank of England base rate between December 2021 and August 2023 saw mortgage rates rise significantly for many. However, if inflation does drop as predicted, the base rate should also reduce, enabling lenders to bring their rates down again.

Several tax changes were announced including:

Multiple dwellings relief – where investors can claim Stamp Duty relief when they buy more than one dwelling in a transaction (or a number of linked transactions) – is going to be scrapped from 6th April 2025.0

Furnished holiday lets tax relief will also be scrapped from 6th April 2025. This relief enables landlords who rent out furnished holiday lets to take the full cost of any mortgage interest payments from rental income and, if they qualify for Business Asset Disposal Relief, they only pay 10% Capital Gains Tax (CGT) when selling.

Higher-rate CGT will drop from 28% to 24%. While lower-rate tax payers are charged CGT at 18% of the rise in the property’s value, higher-rate tax payers pay 28%. The reduction to 24% will be implemented from 6th April 2024.

As mentioned, the biggest help comes from the forecasted fall in inflation to 2% or below, which should ultimately reduce mortgage costs for borrowers.

And whilst the changes to holiday lets will impact the bottom line of some landlords, we believe that some may return to offering longer term tenancies instead – which is good news for families and communities.

Source: Property Notify

HMRC has released a report highlighting the effect of stamp duty relief for first-time buyers (FTBs) following its introduction in 2017.

The report estimates the efficacy of the 2017 First Time Buyers’ Relief in incentivising FTB property transactions in England and Northern Ireland and looks at the below criteria to evaluate the success of this relief:

– The impact on transaction volumes of FTBs; and,
– The impact on prices paid by FTBs

A relief from stamp duty for FTBs was announced in 2017 by the then Chancellor, Philip Hammond, as part of the Autumn Budget.

This meant that FTBs was fully exempt from paying Stamp Duty Land Tax (SDLT) on properties up to the value of £300,000.

Since its introduction, the relief has been subject to several changes; however, HMRC has revealed that in the £125,001 to £300,000 band, the SDLT relief was responsible for in an 11pc increase in purchases and an 18pc increase in the £300,001 to £500,000 band.

In 2022/23, UK government raised over £1,017bn in receipts.

This is equivalent to around 40pc of the size of the UK economy, which is the highest level since the 1980s.

Most receipts come from three main sources: income tax, National Insurance contributions (NICs) and value added tax (VAT).

Together they raised around £586bn in 2022/23. Coventry Building Society revealed that in 2022, more than £16bn of stamp duty was paid by homeowners in England.

This represents a 23pc increase on the previous 12 months.

Source: Property Notify